[PDF] The first in-depth report on the demographics and investing activity

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Professor Laura Huang, Ph.D., Principal Investigator Professor Andy Wu, Ph.D., Assistant Principal Investigator

Min Ju Lee, Head Data Scientist

Jiayi Bao, PhD Student in Applied Economics

Marianne Hudson, Report Lead for Angel Capital Association Elaine Bolle, Communications Lead for Angel Capital Association

The first in-depth

report on the demographics and investing activity of individual American angel investorsANGEL CAPITAL ASSOCIATIONNovember 2017 Wharton Entrepreneurship and Angel Capital Association Executive Summary ........................................................................ 1 About Us ........................................................................ ...................5 Introduction ........................................................................ ..............6 Angel Background ........................................................................ ...7 Gender ........................................................................ ...............................7 Race/Ethnicity ........................................................................ .................7 Age ........................................................................ ......................................8 Educational Background ......................................................................8 Professional Background.....................................................................9 Investing Experience ........................................................................ .....9 Location ........................................................................ .............................10 Investment and Performance ........................................................11 Investment Channel ........................................................................ .......11 Portfolio Composition ........................................................................ ...12 Investment Strategy ........................................................................ ......12 Performance ........................................................................ ....................13 Gender Differences in Investment ................................................14 Investment Preferences and Criteria ...............................................14 Investment Behavior ........................................................................ .....15 Investment Performance .....................................................................15 Impact of Experience ......................................................................16 Professional Experience ......................................................................16 Investment Experience ........................................................................ .17 Gender and Racial Diversity ...............................................................18 Geographic Variation ......................................................................19 Where Do We Go Next? .................................................................20 Appendix—Survey Methodology..................................................21 Endnotes ........................................................................ ...................23

Executive Summary

Early-stage financing from angel investors is critical to the success of high-growth startups. Recent estimates suggest that annual US angel investment activity may total as much as $24 billion each year, contributing to the growth and success of more than 64,000 startups, though the exact amount cannot be measured precisely. Indeed, many details about American angel investors has long eluded public knowledge. Put simply, there is a lack of knowledge on the profile and investment activities of US angel investors. The American Angel campaign was launched with the goal of shedding light on these questions by conducting the largest survey of business angels in the United States and putting faces on the modern American Ang el. This report, commissioned by the Angel Capital Association and the John Huston Fund for Angel Professionalism (raised by Rev1 Ventures), presents the results of the largest ever study of the profile, background, and investment behavior of angels in the US to date. The study comprises responses from 1,659 individual angels from throughout the country who responded to The American Angel survey. www.theamericanangel.org www.theamericanangel.org 1

Executive Summary

Angels May Be Creating Entrepreneurs, But

Entrepreneurs are Also Creating Angels

A key question is how people become angels in the first place: is there a particular background that “creates" more angels than others? The findings presente d here demonstrate that

angels are created “organically" - that is, angels were, at one point, on the other side of the table as

entrepreneurs themselves, and are therefore “local" and familiar with the entrepreneursh ip ecosystem.

55% of angel investors were previously a founder or CEO of their own startup. There is a virtuous cycle

between angels and entrepreneurs—not only do entrepreneurs become angels, but they also give back:

60% of angels with an entrepreneurial background take an

advisory role and 52% of them take a board seat. This compares to 38% of angels without an entrepreneurial background who take an advisory role, and only 26% of them take a board seat. Angels with an entrepreneurial background write larger checks, with an average investment of $39,000 as compared to $28,000 for those with no entrepreneurial background. Angels with an entrepreneurial background make more investments, with an average of 12 companies in their current portfolio, compared to an average of 10 companies for those with no entrepreneurial background.

In terms of their industry experience, 51% of angel investors also report a background in technology.

Taken together, these statistics may provide one explanation for the largely held presumption that the

angel investment market is male-dominated (78% of investors in the study are male). Technology has long been acknowledged to be a male-dominated industry, and startup founders and CEOs are also overwhelmingly male. An inevitable gender imbalance emerges when these sam e individuals become angel investors, resulting in a similar and notable demographic imbalance in the angel investment market. Nevertheless, there is good news on the gender front, as more women become angel investors.

Female Angels are Increasing in Number... and

Changing the Nature of Angel Investing

The American Angel study finds that women actually comprise 22% of angels, a percentage that is much higher than that of venture capital firms. More importantly, the number of women entering the angel investment market appears to be growing. Of angels who started investing within the last two years, 30% of these are women. Women are also changing the role of the angel investor, demonstrating different preferences and investment behavior from men: Female investors place great importance on the gender of the founders they are considering investing in. 51% of women consider the founders" gender to be highly important, while only 6% of their male counterparts considered the founder"s gender to be highly important. Having more female angels may impact the extent to whi ch women-led startups are being given the opportunity and platform to receive early-stage financing. 1 2

What We Learned: Key Takeaways

55% of angel

investors were previously a founder or CEO of their own startup.

2 The American Angel

Executive Summary

www.theamericanangel.org 3

Female investors place more importance on social

impact (with 33% stating that a startup"s social mission is an “extensively used" criteria), more than twice the percentage of men (16%) who “extensively used" social mission as part of their decision criteria.

On the other hand, female investors invest more

modest amounts of capital, at an average check size of $26,500, compared with men who invest an average of $37,700. Female investors are also somewhat less likely to back up their past investments, making follow-on investments 27% of the time as compared with males making follow-on investments for 32% of their investments. The reason for the lower numbers for women may be that more of them are newer to the angel community. Experienced Angels Invest More Upfront and in Follow-On Rounds Investment experience is widely recognized as a determinant of venture capital firm performance, and consistent with this, findings suggest that angel investing tenure does change how angel investors evaluate investment opportunities and form an investment

strategy. Angel investors with the longest tenure devote 15% of their overall investment portfolio to angel

investments and write a check of $42,000 per startup on average. Others with shorter tenure devote only 7% to angel investments and invest $25,000 on average. In a given year, investors with at least 10 years of experience invested in an average of 3.8 companies, whereas other investors invested in an average of 3.0 companies. Angels with more experience are also more likely to double down and make subsequent investments in their existing portfolio of startups. Those with the longest tenure devote 39% of their angel portfolio to follow-on investments, while newer angels allocate 23% to follow-on investments.

Angels are Everywhere . . . Not Just in

San Francisco, New York, and Boston

When thinking about where angel investors reside, many consider only three cities: San Francisco, New York, and Boston. The findings presented here suggest a more balanced dis tribution

of angel investing. In particular, 63% of angel investors in the study are located outside of those cities,

with large percentages in the Great Lakes (16.2%), Southeast (15.4%), and Mid-Atlantic (10.7%). Entrepreneurs should strongly consider fundraising in geographies other than the west coast and the northeast, and may have the greatest success attracting angel capital in their home regions. Furthermore, angels based in California and New England report writing smaller average checks ($32,000) than the average of all other regions in the country ($37,000). Entrepreneurs should also consider the mighty state of Texas, where only 4% of angels in this study reside, but whose average investments are definitely bigger: Texans made the largest angel investments ($44,000). 3 4

Women comprise 22% of

angels, and are 30% of angels who started investing within the last two years.

Angels with the longest tenure

write bigger checks, have larger portfolios and make more follow-on investments.

63% of the angels in

this study are located outside of San Francisco,

New York, and Boston.

Executive Summary

Angel Investing is a “Team Sport"—Angels Invest with Others and are Beginning to Also Use Online Platforms

89% of angel investors in our sample identify prospective investments through

angel groups, even when they are not formal members. Despite this, 24% report that independent investing outside of angel groups is their main channel for deal flow. Angels also report identifying deals through friends and associates (52%), direct contact with entrepreneurs (58%), and online and crowdfunding platforms (17%). There is also a trend in the increase of angels investing alongside other funding vehicles, especially through crowdfunding platforms, with 16% of angels reporting the use of a digital platform for at least one investment.

Angel Investments are Generating Some Positive

Returns and Angels Remain Optimistic

Given the inherent risk of angel investing, most prior studies posit that 5-10% of investments will be economically profitable. This sample of angel investors report that, on

average, 11% of their total portfolio yielded a positive exit. After accounting for stagnant portfolio

companies (sometimes called “zombies"), 39% of portfolio companies that achieve an exit event are positive exits. In terms of future expectations of returns, angels report highe r rates of expected return than their prior investments, which shows considerable confidence in the market. The mean desired target multiple was 9x, with a mean and median target windo w of 5 years.

Angel Investors are Not Mini VCs

Although angel investors are becoming more sophisticated and professional, and increasingly find themselves filling some of the funding gap as VCs move upstream to fund larger investment rounds, angels do not look like VCs. Venture capital continues to be even more heavily male dominated, geographically concentrated in California, New York and Boston, and disproportionally focused on tech centered companies. The angel investing communities are more diverse in many ways and geographically dispersed with greater participation by women. More details on these findings, as well as the complete results from our study, can be found in the full report.

Data Disclaimer

While this is the largest data set ever on individual angels, we recognize that the documented findings within the report do not

necessarily reflect all US angel investors. Despite multiple efforts to address the potential sampling biase

s, there is an over-

sampling of ACA members (60% of the sample) and investors in angel groups (68% of the sample), since 80% of ACA members

belong to angel groups. It may also be that these angels are more active than angels not connected to angel groups or online

platforms. Obtaining retrospective data also has drawbacks, and individuals may have varying levels of recollection of past

experiences that could account for some variation in responses. More information on study methodology and limitat

ions are

discussed in the Survey Methodology appendix. All analyses, interpretations, and conclusions are the opinion of the authors.

5 6 7

Angels are more

diverse than VCs, both geographically and with more participation by women.

4 The American Angel

Executive Summary

The American Angel campaign research is being led by Laura Huang, Ph.D., an Assistant Professor of Management who teaches Entrepreneurship at the Wharton School of the University of Pennsylvania, and Andy Wu, Ph.D., an Assistant Professor of Business Administration who teaches Strategy at the Harvard Business School of Harvard University.

The research team includes:

Professor Laura Huang, Ph.D., Principal Investigator Professor Andy Wu, Ph.D., Assistant Principal Investigator

Min Ju Lee, Head Data Scientist

Jiayi Bao, PhD Student in Applied Economics

Research assistance was provided by Melissa Cui and

Nathan Chiu of the University of Pennsylvania.

Angel Capital Association

The Angel Capital Association (ACA) is the largest angel investor professional development organization in the world. The membership includes over 13,000 angels who invest individually or through 260 angel groups, online platforms, and family offices. ACA members have a collective investment portfolio of more than 90,000 entrepreneurial firms. www.angelcapitalassociation.org

The ACA team on the project includes:

Marianne Hudson, Executive Director, ACA

Elaine Bolle, Past President, Investment Chair RTP Capital, and Board Member ACA Jean Peters, Managing Director, Golden Seeds, and former Board Member, ACA Design: Mackenzie Miller, Creative Director, Pop! Creative Design Copy Editing: Mary Ellen Amodeo, Heather Krejci, Jean Whitney, and Ronda Willsher The report was financed by the John Huston Fund for Angel Professionalism, raised from angels across the US by Rev1 Ventures, in honor of active angel John Huston. Rev1 Ventures provides seed stage venture capital funding in Columbus, Ohio, along with startup services, mentoring, and connections. www.theamericanangel.org 5

Introduction

Introduction

Early-stage financing is critical to the survival and success of startups that drive job creation and productivity growth in the economy. 1,2

While previous studies have

focused on the impact of private equity and venture capital in the entrepreneurial ecosystem, there has been much less research on angel investors, 3 the high-net worth individuals who provide private early-stage capital for startup businesses. These angel investors play a key role in funding the early stage development of new ventures: in 2016, angel investors provided approximately $24 billion to drive the growth and success of more than 64,000 startups. 4 We conducted a nationwide survey to examine who American angel investors are and how they invest. In

this study, angel investors responded to a comprehensive survey to gain insight into questions such as:

Who is the American angel demographically?

What are the education and experience pathways to becoming angels? How do angels identify possible investments, how much do they invest, and how do they perform?quotesdbs_dbs27.pdfusesText_33

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